What to look for in financial advisor?

[XXXmen]

I have no experience dealing with a financial advisor. I've decided to schedule an appoinment with financial advisor at the downtown Bank of Montreal in Toronto next week. I met him briefly and he was very anxious to help me..almost too friendly to be true. He stated they don't charge a fee and was even willing to stay late if needed.His business card has a CFP designation. I'm a mid 30's young single guy who would like to invest my money properly with some advice. What should I look for in a financial advisor? what are some questions I should ask? Are there any tell tale signs when someone is not really working for your best interest? Can anyone offer any tips or suggestions how to approach dealing with this Financial planner. Is there a fee when everything is settled??? Please help anyone??

details of me:

single
$50,00 a year
no debt
moderate risk taker


Thanks.

[Icedawn]

a second this... would love to hear some information on this.

[asdfvcx]

Take a look here:

http://www.redflagdeals.com/forums/showthread.php?t=503280&highlight=advisor

[Frankie3s]

Here's a tip. If you see your financial planner at a Casino or standing in line to play the 6/49 don't use them ;) .

[pitz]

I think the most pivotal conversation you have should address their compensation.

They should disclose properly, fully, and completely, how they are paid, and how much they will be paid when you use their services.

If there are any shortcomings on this disclosure, then you should walk away.

For instance, lets say they propose to sell you $100k of mutual funds, $50k of stocks, and $20k of cash. And lets say that they help you get a new mortgage when yours comes due.

The total compensation would be:

a) Mutual funds -- more than likely, through trailer fees, ~1%/year for the advisor, ~1%/year for the fund management firm, so $2000/year.

b) Stocks. $100 purchase commission * 4 companies = $400.

c) Cash. 0.5%/year * $25k = $125/year

d) Mortgage. If its a 5-year fixed mortgage, they might earn 2% of its value up-front as a brokerage commission. If its a $200k mortgage, thats $4000.

So, if that resembles your portfolio; they've made $7000 in profit from those simple transactions.

Paying a financial advisor a fair wage/salary for their work is perfectly okay -- everyone needs to live. But if you cannot receive proper disclosure of what they will charge you for their services, then how can you evaluate whether you are receiving good value for the services that you purchase? You wouldn't buy a car, a vacation, or a house without a detailled study of the costs involved -- why should anyone do that for investments?

[Frankie3s]

I agree, you have to watch what they charge you in commissions and get this hopefully in writing or via email. Another thing, some FA's will absorb fees for transferring investments from one institution over to them so ask (the FA) first before transferring any dough over to them.

[XXXmen]

Everyone's financial situation is different. So how would the FA
based there commissions. Do they charge less if you make less and charge more if you make more?? I also have other investments in other institutions such as Mutual funds. Would the FA recommend me to move my holdings to one bank?Is that ok?
Can a FA also recommend me to sell/hold a stock? Or would they leave it up to me?? Also after the first meeting what should I expect? do I sign a contract with him? Is he suppose to provide me with anything? How often do we meet after the initial meeting? Should I provide all banking information to him including statements from other banks etc??

This is alot of question, but I really don't have much of a financial background and I don't want to go into a meeting
looking like a "deer in headlights".

I have no problem paying a fee if I know my financial situation
will be better for this. More comments welcomed please.

[pitz]

Everyone's financial situation is different. So how would the FA
based there commissions. Do they charge less if you make less and charge more if you make more??


That's definitely one way of compensating an advisor. The point I made upthread is that you should have a full, frank, and honest disclosure of how the advisor is to be compensated, how much they are to be compensated, and any bonuses that may be awarded thereof.

If an advisor is not open to such a discussion, or attempts to minimize or otherwise downplay the importance of such a discussion, then my advice, unequivocally, is to find someone else.

Its really a matter of trust.


I also have other investments in other institutions such as Mutual funds. Would the FA recommend me to move my holdings to one bank?Is that ok?


Maybe. A FA should be able to look at your *overall* state of finances, and help you to make adjustments accordingly. A good FA, acting without partiality and conflict-of-interest, would recommend you purchase and use the most effective and efficient investments for your needs.

What you want to avoid, at all costs, is paying for advice where there is a conflict of interest. You want your advisor to be working for you, not churning your account or placing you into high cost funds for his own benefit.


Can a FA also recommend me to sell/hold a stock? Or would they leave it up to me?? Also


You can purchase whatever advice you want.

At the very least, I would expect a competent advisor to sit down with you, gather and consolidate information, and generate some perspectives on what your overall portfolio is. The relationship would progress towards developing an investment policy statement that includes asset allocation. Implementation would follow thereafter.

Be wary of dealing with someone who is merely interested in selling you a lot of funds. It is possible, for example, that you are already invested in funds that are perfectly suitable and balanced to your needs.


This is alot of question, but I really don't have much of a financial background and I don't want to go into a meeting
looking like a "deer in headlights".


I'm personally a fan of the fee for service model; basically, you pay $2000-$3000 for an in-depth consultation that includes a review of your current assets and liabilities. From this process, an asset allocation and investment policy statement would be generated. You can then use the investment policy statement to make purchases of stocks, bonds, etc. as appropriate.



I have no problem paying a fee if I know my financial situation
will be better for this. More comments welcomed please.

Paying a fee, either explicitly, or deducted from your investments, may or may not help your outcome. Its best to focus your attention on the process of investing, and the risk/return tradeoff with investing, rather than concentrating on the use of individual products.

Be very wary of any financial advisor that promises to call you when the next 'hot stock' comes up, or a FA that pitches a lot of 'product' towards you.

[harlequin]

I totally agree with Pitz, it would be best to get a FA that is fee-based rather then commission-based. There is simply too much of a conflict of interest with commissions. Actually, the fact that he mentioned he "doesn't charge a fee" should send up a red flag - this could be an attempt to mislead you as to the cost of his services. Take a good look at his downtown office when you meet him; pretty steep overhead which comes out of the fees that he will extract from you indirectly over the years.

And this brings me to another point. You need to understand the mathematics of how much you will pay in fees over the long term if your FA (and the other financial intermediaries) take a small piece of your capital every year. This is examined in an article by John Bogle:

http://www.vanguard.com/bogle_site/sp20050210.htm

Check out the graph in the middle of the article titled "The cumulative lag caused by 2.5% costs in an 8% market". What it basically is saying is that you will pay as much to the financial intermediaries over 29 years of investing as you would get for yourself. That is the true cost of their advice. It would be well worth your time to learn the basics of investing on your own and manage your own money - most of it is pretty basic and would not take up a lot of your time. If you need specialized advice (e.g. insurance, estate planning, taxes), you can always consult with fee-based planner as needed.

[Thalo]

The Financial Planner (if that is what he is) should either sell you a financial plan for a specified amount, as Pitz mentioned, and not profit at all off of your investments, OR should give you a plan for free and manage your investments for you (at a profit to them). Make sure he doesn't sell any front end or back end mutual funds. If he does that, he's really just looking to profit off the sale of funds and not the long client relationship. His firm already profits 1% per year on your equity mutual funds (of which he gets a portion), it's silly to pay him commissions on top of that.

The CFP designation is a plus. It's not easy to get, he must have already completed a series of investment industry courses to get there and/or have a fair amount of experience and also the CFP has continuing education requirements, so he'll have to keep up his knowledge over time.

[gerbil]

Everybody has really some very important points to consider!!
Amazing!!!

One piece of advise I would recommend is reading the book - PERSONAL FINANCE for Canadians FOR DUMMIES (http://www.chapters.indigo.ca/books/Personal-Finance-Canadians-Dummies-Eric-Tyson-Tony-Martin/9781894413299-item.html?ref=Search+Books%3a+%2527personal+financ e+for+canadians%2527). Any average joe would understant it's concept, particularly in Chapter 19: Financial Planners.

On this chapter, one of the topic which really intrigues me is to Interview a Potenntial Financial Adviser. A few questions to ask are:

1. What percentage of your income comes from fees faid by your clients versus commissions from products that you sell?
2. What percentage of fee paid by our clients is for ongoing money management versus hourly financial planning?
3. What is your hourly fee?
4. Do you also perform tax or legal services?
5. What work and educational experience qualifies you to be a financial planner?
6. Have you eer sold limited partnerships? Futures? Commodities?
7. Do you carry liability insurance?
8. Can you provide references of clients with needs similar to mine?
9. Will you provide specific strategies and product recommendations that I can implement on my own if I choose?
10. How is implementation handled?


One more thing, if the FINANCIAL PLAN he is offering you would cost you money. I would suggest to walk away because you should not pay for this plan @ all.

Hope this helps!

[pitz]

One more thing, if the FINANCIAL PLAN he is offering you would cost you money. I would suggest to walk away because you should not pay for this plan @ all.


What?? I would prefer to pay for a 'plan' explicitly, instead of having the 'advisor' extract the cost of making the 'plan' from me in other ways that are less than transparent.

Nobody (especially financial advisors) works for free, and you shouldn't expect, nor believe that they are creating a plan for you free of charge.

Professional advice costs money. Not paying for a plan, if you need one, is penny wise, pound foolish.

[John_In_Vancouver]

At the end of the day it is important to realize that to do a service for a client, the advisor must be compensated. They have families to feed too, just like everyone of us.

Helping the client save, invest, create and implement a strategy is very important.

If the advisor has created a good plan for you, why not give that person the business of investments, mortgage, insurance etc?

If you go to a person to do a paid financial plan for you and then get referred to another person to place the recommended plan, that person who places the plan will still get paid.

The reason for this is that in the financial world someone will get paid on the chosen products at the end of the day whether is is back load, low load, no load, front load, wrap account, trailer fee, stock purchase/sale, mortgage commission, insurance commission and so on.

When choosing an advisor, it is important to know how they are paid, but the most important factor is choosing an advisor... someone that will listen to you, above everything else.

[harlequin]

Warren Buffet provides a very good conceptual explaination of how financial intermediaries cut into investment returns. To read it, download his 2005 chairman's letter to investors at:

http://www.berkshirehathaway.com/letters/2005ltr.pdf

Read pp. 18 and 19. (the section "How to Minimize Investment Returns"). We, collectively, are the Gotrocks and the 'Helpers' are all the FAs and other financial intermediaries.

How much are these financial intermediaries taking from the Gotrocks? Well, quite a bit more in Canada than other countries:

http://www.thestar.com/columnists/article/211395

So, do you want to feed your FA's family, or your own? While it is true that you cannot avoid paying financial intermediaries something, there are investment products with very small fees (e.g. basic Exchange Traded Funds), and investment products with obscenely large fees (e.g. Mutual Funds Wraps). With a bit of self-study, you will be able to manage your own investments with the former and save yourself tons of money in the long run.

[Thalo]

Some people are okay trading ETFs in a discount brokerage account, but that's not for everybody. For the average Joe who doesn't want to constantly be rebalancing his funds a wrap fund might be the best option. To each his own.

A for fee financial planner might be good for financial experts like Pitz, who can take the plan and implement it themselves using stocks and/or ETFs but the vast majority of Canadians need hand holding with their investments. In that case, why not give them the plan for free on the condition that you manage their investments for them and build and maintain a long-term relationship. As opposed to: here's the plan, here's the fee, now get out. If everyone were an expert and could do everything themselves then for-fee planners would be the only choice as the long-term cost would be much lower. For 90% of Canadians the other model works better. What definitely doesn't make sense is planners who charge for the plan and then manage the investments and on top of that they put their clients in wrap products with back end commissions.

[harlequin]

It really isn't that hard to invest using ETFs. I have told some of my friends about the "couch potato" strategy:

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_152254_1452

I think most Canadians could do what this article suggests, and the rebalancing is not that much of a chore.

[gerbil]

Nobody (especially financial advisors) works for free, and you shouldn't expect, nor believe that they are creating a plan for you free of charge.


I really .. really agree with you. No body works for free.
I strongly suggest to do more research regarding Financial Planning and the Companies that you deal with. Actually, there's a company that deals with Financial Plan that helps people get out of debt and save money free of charge and implement it for you.

[gerbil]

At the end of the day it is important to realize that to do a service for a client, the advisor must be compensated. They have families to feed too, just like everyone of us.


What if the plan is set up for disaster?
Mainly, getting ripp for the wrong kind - like if the money wasn't growing fast enough, nor having the wrong kind of protection, continously putting you in debt.

Would this be a ethical way of living?

[John_In_Vancouver]

What if the plan is set up for disaster?
Mainly, getting ripp for the wrong kind - like if the money wasn't growing fast enough, nor having the wrong kind of protection, continously putting you in debt.

Would this be a ethical way of living?

The client should review the plan before buying into it. If the plan shows 15% annual growth on investments every year, run for the hills.

[gerbil]

Warren Buffet provides a very good conceptual explaination of how financial intermediaries cut into investment returns. To read it, download his 2005 chairman's letter to investors at:

http://www.berkshirehathaway.com/letters/2005ltr.pdf

Read pp. 18 and 19. (the section "How to Minimize Investment Returns"). We, collectively, are the Gotrocks and the 'Helpers' are all the FAs and other financial intermediaries.



I got lost on this statement ..
Why would anybody want to minimize investment returns? Shouldn't the client/people get a better return on their money? have it grow and compound annually?

fyi .. i didn't read all of it. heck, an average guy couldn't even understand half the stuff in this article. Investment is suppose to be easy to understand but most complicate it.

[gerbil]

The client should review the plan before buying into it. If the plan shows 15% annual growth on investments every year, run for the hills.

I hear you JOHN ..
"IF the plan shows 15% annual growth on investments every year .."

If the plan works .. the client SHOULD get 15% rater of return on their money, heck my credit card is growing faster than my investment. INFLATION is getting better return on GIC's. I mean does this makes any sense at all ..

Like what I mentioned, would it make any sense to have a plan that cost $1000-$2000 for a Financial Plan done by a Financial Planner, where your money not growing fast enough, barely keeping up with inflation, stuck on investments such as GIC's ...

I think at the end of the day, it's really ourselves and our families that's most important.

[harlequin]

I got lost on this statement ..
Why would anybody want to minimize investment returns? Shouldn't the client/people get a better return on their money? have it grow and compound annually?

Warren Buffet is saying that if there are too many financial intermediaries involved in managing your investments, it will reduce your returns. In other words, an important step in maximizing your return is to reduce the number of intermediaries

[edthebum]

'Invest' the time and effort in basic finance and learn how to do it yourself. Yes it can be painful if you hate the stuff but I have never heard of anyone who did it complain that their time was wasted after the fact.....usually they think it was the best thing they ever did, at least monetarily. If you want to go this way, you can find all the resources at your local library and on the web. You won't find much in the way of educational content here but there are many blogs and forums (Canadian ones) where the content is well written and well thought out. If you are so inclined, I'm sure people here will point you in the right direction.

[asdfvcx]

It really isn't that hard to invest using ETFs. I have told some of my friends about the "couch potato" strategy:

http://www.canadianbusiness.com/my_money/investing/article.jsp?content=20060405_152254_1452

I think most Canadians could do what this article suggests, and the rebalancing is not that much of a chore.
You're still over-estimating the ability of many people to stick to a plan.

During the recent turbulence we had in the market during July and August, there was a thread (http://www.redflagdeals.com/forums/showthread.php?t=469115) started, where many people started to panic and discuss things like whether they should completely pull out of equities and whether it would be a good idea to try to time to market or swing trade, etc...

Many investors have shown time after time, that they need professional assistance in sticking to a reasonable plan. These people would be much better off using some type of advisor.

Now if you don't need the help, then you shouldn't use it. Especially seeing as how the price of financial help in Canada tends to be quite a bit higher than in the rest of the Western world.

But there are too many Canadian who, despite how much they try to educate themselves, will still panic when the markets get a bit choppy. And they need a bit of help to stick with their plans.

[15-20_God]

almost anything can be done without the help of an intermediary. I could read a book and never have to see a mechanic again, heck I could read a book and change my own oil if i felt inclined.....but i don't. i'd gladly fork out the money for someone else to do it, same with my taxes, same with snow shovelling, same with some of the food i eat. as long as they add value that justifies the expenditure i'm kosher.

i don't know about warren buffets book, but i've read and studied ty cobb's biography and i still can't hit like him. and i'm doing exactly what he preaches.

[harlequin]

During the recent turbulence we had in the market during July and August, there was a thread (http://www.redflagdeals.com/forums/showthread.php?t=469115) started, where many people started to panic and discuss things like whether they should completely pull out of equities and whether it would be a good idea to try to time to market or swing trade, etc...

This actually demonstrates one way how do-it-yourself (DIY) investing works. Someone who is managing their own finances but is relatively inexperienced can seek help in forums like RedFlagDeals when there is market turbulence. If they are inclined to panic and sell, the more experienced DIYers are there to tell them to hang tough. A whole lot cheaper in the long run then having a FA.

You make a good point that technical knowledge of investing is only part of the picture - you need to have control over your emotions, discipline, long term focus, etc. But I believe this can be developed over time with practice, experience and bit of study.

[15-20_God]

This actually demonstrates one way how do-it-yourself (DIY) investing works. Someone who is managing their own finances but is relatively inexperienced can seek help in forums like RedFlagDeals when there is market turbulence.

rfd is the last place i would look to for financial advice. ex. "i have $20,000 to invest for 1 year, what should I do?" ans. buy a bank, you'll never lose money with canadian banks.

and do you really think a forum where members spend $10 in gas and an hour haggling to save $5 off something they never really wanted in the first is the best place for advice?

[harlequin]

almost anything can be done without the help of an intermediary. I could read a book and never have to see a mechanic again, heck I could read a book and change my own oil if i felt inclined.....but i don't. i'd gladly fork out the money for someone else to do it, same with my taxes, same with snow shovelling, same with some of the food i eat. as long as they add value that justifies the expenditure i'm kosher.

i don't know about warren buffets book, but i've read and studied ty cobb's biography and i still can't hit like him. and i'm doing exactly what he preaches.

You hit the nail on the head with the phrase I have bolded. When considering the use of a FA, ask yourself:

1. how much will I pay them?
2. how much value will they add?

As I have explained earlier, over the long term you will pay them a huge amount of money. This is often not obvious to people because of the way fees are hidden, and a lack of understanding of the mathematics of exponential growth.

As to the value they add, anyone can buy a ETF that tracks the market index. If a FA can consistently beat that index over the long term by, say, 2 to 2.5%, then yes they have earned their fee. But very few financial pros can do this - they may have a hot year or two, but not over 20 or 30 years.

I can't hit like Ty Cobb either, nor can I invest as profitably as Warren Buffet. But I am not trying to win the American League MVP award nor be a multi-billionaire. I just want a reasonable amount of financial security, and I can better achieve this with DIY investing, and so can most regular people.